Accounting for business combinations and consolidated ... - IFRS

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Dec 13, 2013 (3 years and 7 months ago)

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International Financial Reporting Standards

The views expressed in this presentation are those of the
presenter,
not
necessarily those of the IASB or IFRS Foundation.

©
IFRS Foundation |
30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Accounting for

business combinations
and consolidated
financial statements

Joint World Bank and IFRS Foundation ‘train the
trainers’ workshop hosted by the ECCB,

30 April to 4 May 2012

International Financial Reporting Standards

The views expressed in this presentation are those of the
presenter,

not necessarily those of the IASB or IFRS Foundation

Control

IFRS 10
Consolidated Financial Statements

[[[


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Objective


Information about


resources under the control of the group
(assets)
and


claims against those resources


assists users to better assess the prospects for future
net cash inflows to the group which is useful in making
decisions about providing resources to the group.


The global financial crisis highlighted the importance of
enhancing disclosure requirements, in particular for
special purpose or structured entities.


3

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Definition of control


Single consolidation model for all entities, including structured
entities


Consolidation based on control


‘power so as to benefit’
model


Investor
must have some exposure to risks and
rewards


Exposure is an indicator of control but

not
control of itself


Power arises from rights

voting
rights,
potential voting
rights, other contractual arrangements, or a combination
thereof.


An
investor controls an investee when the investor
is exposed, or
has rights, to
variable returns

from its involvement with the
investee and has
the
ability to affect those returns

through its
power

over the investee
.

4

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Assessing control of an
investee


Consider the
purpose and design


Identify the
activities
of the investee that
significantly
affect the returns

of the investee
(relevant
activities)


Identify
how decisions
about relevant activities are
made


Determine whether the rights of the investor give it the
ability to
direct the relevant activities
(see next slide)


Determine whether the
investor is exposed, or has
rights, to the variability

associated with the returns of
the investee


Determine whether the investor has the
ability to use its
power over the investee to affect its own returns


5

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Example:

Control

In the absence of evidence to the contrary, in each
scenario below, does A control Z?

i.
A owns 100% of Z.

ii.
A owns 51% of Z.

iii.
A owns 50% of Z.

iv.
A owns 50% of Z and holds currently exercisable ‘in
the money’ options to acquire another 100 shares in Z.

v.
Same as (iv) except B owns the options.

6

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7

Example:

Structured entity

A pharmaceutical manufacturer (entity A) established a
viral research centre (RC) at a university.


A determined sole & unalterable purpose of RC =
research & develop immunisation & cures for viruses
that cause human suffering.


RC is owned and staffed by the university.

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8


All costs of establishing & running RC are paid by the
university from the proceeds of a grant from A.


the budget for the research centre is approved by A
yearly in advance.


A benefits from the research centre:


by association with the university; and


through exclusive right to patent any immunisations
and cures developed
.

Example:

Structured entity
continued

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De facto control


Entity can control with less than 50% of voting rights.


Factors to consider include:


size of the holding relative to
the size and
dispersion of other vote holders


potential voting rights


other contractual rights


If the above not conclusive
consider additional facts
and
circumstances that provide evidence of power (
eg

voting patterns at previous board meeting,
etc
)



9

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Example:

de facto control


Entity A owns 45 per cent of the ordinary shares of
Entity B to which voting rights are attached.



Entity
A is the largest shareholder of Entity B.



It
also has the right to appoint the majority of the
members of the Board
of Directors (the management
board) of Entity B in accordance with special rights
given to Entity A in the founding document of the entity.


10

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Example:

Assessing power


Entity A and B each have 50%
ownership interest in the trust.


Entity A appointed as manager
of trust.


Manager:
manages the assets
of the trust, identifies
development opportunities,
manages development activity
and manages leasing activity.
Cannot be removed without
cause.


Relevant activities?


Who directs?


11



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Example:

Delegated
rights

Responsible
entity
:


Broad decision making
powers


Removal by simple majority


Remunerated via market
-
based fee
-

1% of assets
under management and
20% of profits over a hurdle


Equity interest of 20%


12


Investment
trust

Responsible

entity

Other
investors

Investment
portfolio

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Potential
voting rights


Substantive potential voting rights (PVR) can give the
holder power


Consider the terms and conditions, including:


Whether there are
any barriers
that prevent the
holder from exercising


Whether
exercise of the rights would be beneficial
to the holder


Whether the rights
are exercisable
when decisions
need to be made



13

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Agency relationships


Consider all of the following
factors:


scope of the
decision
-
making authority


rights held by other parties
(
ie

kick
-
out rights)


remuneration
of the decision
-
maker


other interests
that the decision maker holds in the
investee


14

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Determining whether an investor controls an investee
involves assessing whether the investor:


has power over the investee


exposure, or rights, to variable returns from its
involvement with the investee


the ability to use its power over the investee to
affect the amount of the investor’s returns.


15

Judgements and
estimates

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Factors to consider when assessing whether control
exists include, for example:


assessing the purpose and design of the investee
(
eg

are voting rights or contractual arrangements
the dominant factor?)


identifying relevant activities and how decisions
about those activities are made


assessing current ability to direct (practical ability to
direct the relevant activities unilaterally?)

16

Judgements and estimates
continued

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International Financial Reporting Standards

The views expressed in this presentation are those of the
presenter,

not necessarily those of the IASB or IFRS Foundation

IFRS 3

Business Combinations

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Introduction


A business combination is a transaction or other event
in which a reporting entity (the acquirer) obtains control
of one or more businesses (the
acquiree
).


IFRS 3
does not apply
to the
following:


t
he formation of a
joint venture


the
acquisition

of an asset or group of assets that is
not a business as defined


a combination of entities or businesses under
common control

18

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The acquisition
method


Business combinations are accounted for using the
acquisition method
,
ie


i
dentifying the
acquirer
;


determining the
acquisition date
;


recognise

and measure the
identifiable assets
acquired and the liabilities assumed
and any non
-
controlling interest; and


recognise

and measure any
goodwill or bargain
purchase.

19

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Identifying the acquirer


The acquirer is the entity that obtains control of another
entity

20

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Example:

Who
is the acquirer
?


On
31/12/20X0 A has 100 shares in issue.


On
1/1/20X1 A issued 200 new A shares to the owners
of B in exchange for all of B’s shares.

21

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Determining the acquisition date


The acquisition date is the
date on which the acquirer
obtains control


often the date the consideration is transferred,
assets are acquired and liabilities assumed

closing date


may be other dates (earlier or later than the closing
date) at which control is assumed


22

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Recognition principle

(IFRS 3.10

17):


separate recognition
of identifiable assets acquired,
liabilities
and contingent liabilities
assumed (think
Conceptual Framework
)


Measurement principle

(IFRS 3.18

20):


a
ssets and liabilities
that qualify for recognition are
measured
at their acquisition
-
date fair values


m
easurement at fair value provides relevant
information that is more comparable and
understandable (IFRS 3.BC198)

23

Recognition and measurement

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Reacquired rights


measured at fair value based on remaining
contractual term ignoring the fair value effect of
renewal


Share
-
based payment transactions


replacement awards: measured in accordance with
IFRS 2


Assets held for sale


measured in accordance with IFRS 5 (
ie

fair value
less costs to sell)



24

Exceptions to the measurement

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Income taxes


deferred tax assets or liabilities arising from acquired
assets or liabilities accounted for using IAS 12


Employee benefits


accounted for using IAS 19


Indemnification assets


may not be recognised at fair value if it relates to an
item not recognised or measured in accordance with
IFRS 3




25

Exceptions to both the recognition
and measurement principles

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The consideration transferred is
measured at the fair
value of the sum of assets transferred and liabilities
assumed


acquisition
-
related costs are excluded


contingent consideration is included at its fair value
at acquisition date
(subsequent changes in fair
value are not included in the consideration
transferred at acquisition
-
date)

26

Consideration transferred

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Example:

What
is the cost of the Bus Com
?


Entity A acquires 75% of entity B in exchange for
CU85,000 cash and 1,000 entity A shares (fair value =
CU10,000) issued for the transfer.


Entity A incurred CU5,000 advisory and legal costs
directly attributable to the business combination and
CU1,000 share issue expenses.

27

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Goodwill (an asset) is
measured initially indirectly as the
difference between the consideration transferred
(see IFRS
3.37

40) excluding transaction costs in exchange for the
acquiree’s

identifiable assets, liabilities and contingent
liabilities (measured as set out above)

28

Goodwill

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If the
value of

acquired
identifiable assets and liabilities
exceeds the consideration
transferred,
the acquirer
immediately
recognises

a gain

(
bargain purchase
)


Goodwill is
not amortised
, but is subject to an
impairment
test.


If less
than
100%
of the equity interests of another entity
is
acquired in
a business
combination, non
-
controlling
interest is
recognised
.


Choice
in each business combination
to
measure
non
-
controlling
interest
either
at
fair value
or at the
non
-
controlling interest’s
proportionate share
of the
acquiree’s

identifiable net assets.

29

Goodwill

continued

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Comprehensive disclosure requirements designed to
enable users to evaluate the nature and financial
effects of business combinations (and any
adjustments made to prior period business
combinations).


Refer to IFRS 3.B64

B67.

30

Disclosure

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The main differences between IFRS 3 and Section 19
Business Combinations and Goodwill
of the
IFRS for
SMEs

include:


the
costs associated with acquisition are included in
the consideration

transferred rather than being
expensed


changes in the
recognised

amount of
contingent
consideration affect goodwill


goodwill is amortised
over its estimated useful life (or
10 years if a reliable estimate cannot be made)


non
-
controlling interest must be measured using the
proportionate share
method

31

Comparison to the
IFRS for
SMEs

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Determining whether a particular set of assets and
activities is a business requires assessing their
capabilities of being conducted and managed for the
purpose of providing economic benefits.


Identifying the acquirer in some business
combinations that combine two or more entities can
require judgement.

32

Judgements and
estimates

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Accounting for business combinations requires broad
use of fair value estimates
. Level 3 fair value
measurement can require significant judgements and
estimates (see IFRS 13).


The
acquiree’s

identifiable
intangible assets
at the
acquisition date
are recognised separately
and might
include assets that have not been recognised by the
acquiree
.

33

Judgements and estimates
continued

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30 Cannon Street | London EC4M 6XH | UK.
www.ifrs.org

International Financial Reporting Standards

The views expressed in this presentation are those of the
presenter,

not necessarily those of the IASB or IFRS Foundation

IFRS 10

Consolidated Financial
Statements

[[[


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Effective
Date


Aligned
effective
date
for IFRS
10 and IFRS 12


Annual periods beginning on or after 1 January
2013


Earlier application permitted if applied as a
package

35

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Introduction


IFRS 10
establishes principles for the presentation and
preparation
of consolidated financial statements when
an entity controls one or more other entities.


36

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An
entity that has one or more subsidiaries
(a parent)
must present consolidated financial statements.


Two exceptions:


a

parent if:


its owners
have been informed
and
do not
object,


its securities are
not publicly traded
or in the process of
becoming publicly traded, and


its parent publishes IFRS
-
compliant financial statements
that are available to the public
.


Post
-
employment
plans
or other long
-
term employee
benefit plans to which IAS 19 applies





37

Who presents consolidated
financial statements
?

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Consolidated financial statements present the parent
and all its subsidiaries as financial statements of a
single economic entity


uniform accounting
policies


same
reporting

periods


eliminate intragroup
transactions and balances


non
-
controlling interest
(the equity in a subsidiary that is
not attributable, directly or indirectly, to the parent) is
presented within equity, separately from the parent
shareholders’ equity.


38

Principle

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39

Example:

Consolidation procedures


On 1/1/20X1 entity A acquires 100% of entity B for
CU1,000 when
B’s share capital & reserves = CU700
(net
FV of B’s assets & liabilities =
CU800
).


B has no contingent liabilities. The
CU100
difference
between CA & FV is
i.r.o
.
a machine with 5
yrs

remaining
useful life
and nil residual value.


B’s
profit for the year ended 31/12/20X1 =
CU400
.


In
20X1 A
sold inventory
which cost it
100 to B for 150
. At
31/12/20X1
B’s inventory included CU60 inventory
bought
from A.


Ignore
taxation effects
.

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40


The
proforma

journal entry at acquisition to eliminate
A’s investment in B;
recognise

goodwill; & eliminate B’s
share capital & reserves accumulated before it became
part of the group.


Property, plant & equipment

100

B’s at
-
acquisition share capital &
reserves

700

Goodwill (asset)

200


A’s investment in B

1,000

Example:

Consolidation procedures
continued

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41


Proforma

journal entry to increase depreciation to
group values (remaining estimated useful life = 5
years):

Example:

Consolidation procedures
continued

Profit or loss

20


Property, plant & equipment

20

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42


Proforma

journal entry to eliminate intragroup sale of
inventory and the
unrealise

profit in inventories
(ignoring tax effects):



Profit or loss (revenue)

150


Profit or loss (COS)

150

Profit or loss (COS)

20


Inventory (asset)

20

Example:

Consolidation procedures
continued

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43


Non
-
controlling interest (NCI) in net assets consists of:


the amount
of the NCI
recognised

in accounting for
Bus Com
at date of acquisition
; plus


the NCI’s share of
recognised

changes in equity
(
ie

recognised

changes in Sub’s net assets) since the
date of the combination.

Non
-
controlling interest (NCI)

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44

Example:

NCI


On 1/1/20X1 entity A acquires
75% of entity B for
CU1,000

when B’s share capital & reserves =
CU700

(net FV of B’s assets & liabilities =
CU800
).


B has no contingent liabilities. The CU100 difference
between CA & FV is
i.r.o
. a machine with 5
yrs

remaining useful life and nil residual value.


Ignore taxation effects. B’s profit for the year ended
31/12/20X1 = CU400.


In 20X1 A sold inventory which cost it 100 to B for 150.
At 31/12/20X1 B’s inventory included CU60 inventory
bought from A.


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45

Eliminate Investment


Proforma

journal entry at acquisition is:



Property, plant & equip.

100

B’s at
-
acquisition share capital &
reserves


700

Goodwill

400


Non
-
controlling interest

200


A’s investment in B

1,000

Example:

NCI
continued

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46

Adjust consolidated depreciation


Proforma

journal entry to increase depreciation to
group values (remaining estimated useful life = 5
years):



Profit or loss

20


Property, plant & equipment

20

Example:

NCI
continued

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47

Allocate profit


Proforma

journal entry allocating the NCI their share of
B’s profit for the year:





NCI profit allocation

95


NCI (equity)

95

Calculation:

Profit





400

Depreciation adjust




(20)






380

25% attributable to NCI


95

Example:

NCI
continued

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48


Proforma

journal entry to eliminate downstream
intragroup sale of inventory and the unrealised profit in
inventories (ignoring tax effects):



Profit or loss (revenue)

150


Profit or loss (COS)

150

Profit or loss (COS)

20


Inventory (asset)

20

Example:

NCI
continued

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49


Same as previous example except
upstream sale of
inventory (
ie

from B to A)


Same
proforma

journal entries as in previous example
and an additional journal entry (below) to eliminate
from NCI their share of the unrealised profit:




NCI (equity)

5


NCI profit allocation

5

Example:

NCI upstream sale

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If a parent no longer controls a subsidiary, the parent:


Derecognises the assets and liabilities
of the
former subsidiary.


Recognises

any retained investment at fair value
when control is lost. This investment is
subsequently accounted for as a financial
instrument or, if appropriate as an associate or joint
venture.


Recognises

a gain or loss
associated with loss of
control.


50

Loss of
control

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Section 19 Business Combinations and Goodwill
of
the
IFRS for SMEs differs
from full IFRSs

in Section
19:


goodwill is amortised
over its estimated useful life
(or 10 years if a reliable estimate cannot be
made)


non
-
controlling interest must be measured using
the
proportionate share method


there is no specified maximum allowable
difference between the reporting periods of the
parent and the subsidiary.

51

Comparison with the
IFRS for
SMEs

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International Financial Reporting Standards

The views expressed in this presentation are those of the
presenter,

not necessarily those of the IASB or IFRS Foundation

IFRS 12

Disclosure of Interests in

Other Entities

[[[


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Introduction


IFRS 12 applies to
entities that have an interest in a
subsidiary, a joint arrangement, an associate or an
unconsolidated structured entity
.


It does not apply to (paragraph 6):


Post
-
employment plans to which IAS 19 applies.


Entities’ separate financial statements to which IAS 27
applies.


A joint arrangement where joint control does not exist
(unless significant influence exists).


An interest in another entity accounted for in terms of
IFRS 9 (with exceptions).

53

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Users have consistently requested
improvements to the
disclosure

of a reporting entity’s interests in other
entities.


The global financial crisis also highlighted a lack of
transparency about the risks to which a reporting entity
was exposed from its involvement with structured
entities.


In response to input received from users and others, the
IASB decided to address in IFRS 12 the need for
improved disclosure of a reporting entity’s interests in
other entities.

54

Reasons for issuing
IFRS

12

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IFRS 12 requires an entity to disclose information that
enables users of financial statements to evaluate:


the
nature of, and risks associated with
, its interests
in other entities; and


the
effects of those interests
on its financial position,
financial performance and cash flows.


That evaluation assists users in
making

decisions

about
providing resources to the entity.


55

Objective

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56


Disclosures


significant judgements
and assumptions made


information
about interests
in:


subsidiaries


joint arrangements and associates


unconsolidated structured entities


any additional information that is necessary to meet the
disclosure objective

56

Strike a balance between overburdening financial
statements with excessive detail and obscuring information
as a result of too much aggregation

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57

Subsidiaries


The

composition of the group
(including any
changes)


Involvement of NCI
in the group’s activities (including
profit and loss allocation and summarised financial
information for subsidiaries with large NCI)


The
effect of significant or unusual restrictions
on
assets and liabilities


The

nature of, and changes in, the
risks associated
with structured entities

57

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58

Unconsolidated structured entities

Nature and extent of interests in unconsolidated structured
entities


eg

nature, purpose, size, activities and financing


For sponsors not providing other risk disclosures


Type of income earned


The carrying amount of all assets transferred

Nature of, and changes in, the risks associated with an
entity’s interests


Carrying amount of the assets and liabilities recognised


Maximum exposure to loss and comparison to carrying
amounts


Non
-
contractual support provided

58

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An entity must disclose information about significant
judgements and assumptions it has made in
determining:


control of another entity (see IFRS 10)


Joint control (see IFRS 11) of an arrangement or
significant influence (see IAS 28) over an entity


type of joint arrangement when the arrangement has
been structured through a separate vehicle

59

Judgements and
estimates

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For unconsolidated structured entities, a summary of
the amount that best represents the entity’s maximum
exposure to loss for its interest must be provided.


60

Judgements and estimates
continued

©
IFRS Foundation |
30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

61

Questions or comments?

Expressions of individual views
by members of the IASB and its
staff are encouraged.


The views expressed in this
presentation are those of the
presenter.


Official positions of the IASB on
accounting matters are
determined only after extensive
due process and deliberation.

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org

62



The requirements are set out in
International Financial
Reporting Standards (IFRSs)
, as issued by the IASB at
1 January 2012 with an effective date after 1 January
2012 but not the IFRSs they will replace.


The IFRS Foundation, the authors, the presenters and
the publishers do not accept responsibility for loss
caused to any person who acts or refrains from acting
in reliance on the material in this PowerPoint
presentation, whether such loss is caused by
negligence or otherwise.

62

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org